Bankruptcy Court Denies Request to Disband Creditors’ Committee

On May 17, 2019, the Bankruptcy Court for the Southern District of New York announced that the Official Committee of Consumer Creditors (the “Consumer Committee”) appointed in the In re Ditech Holding Corp. bankruptcy case would not be disbanded. Ditech, supported by the ad hoc group of term loan lenders (the “Ad Hoc Group”), had filed a motion requesting that the Consumer Committee be disbanded or alternatively have a limited scope and budget. After receiving objections from the U.S. Trustee (the “UST”), Consumer Committee, and various consumer borrower groups, the Court refused to disband or otherwise limit the Consumer Committee. The Court found that consumers constitute the majority of Ditech’s unsecured creditors and that the Official Committee of Unsecured Creditors (“UCC”) could not adequately protect consumer borrower issues arising under section 363(o) of the Bankruptcy Code.

Request and Appointment of the Consumer Committee

On April 19, 2019, the Bluhm Legal Clinic at Northwestern Pritzker School of Law (the “Clinic”) filed a letter in Ditech requesting the appointment of a consumer creditor committee on behalf of three consumer borrowers who had each entered into a reverse mortgage arrangement with an affiliate of Ditech. The reverse mortgage allowed the consumers to borrow against the equity in their home. The Clinic asserted that the Ditech loans were “predatory and exploitative [in] nature,” were conducted “fraudulently,” and led to the consumers receiving “no proceeds or benefits.” Four days after the Clinic’s letter was filed, a law firm (the “Firm”) joined the Clinic’s request, asserting that the Firm represented hundreds of similarly situated consumer borrowers and that the Firm was “concerned that the Debtor’s reorganization will rely on the continued abuse of existing consumers and create new victims.” On March 2, 2019, the UST appointed the five member Consumer Committee to represent all consumer creditors.

Challenge Against Appointment of the Consumer Committee

On May 8, 2019, Ditech filed a motion seeking to disband or, alternatively, limit the Consumer Committee’s scope and cap the Consumer Committee’s fees and expenses at $250,000. Ditech argued that the appointment of the Consumer Committee would (a) cause “unnecessary complexity and delay [to] these chapter 11 cases,” (b) lead to “unnecessary incremental costs on the estates,” (c) cast “a shadow on the bidding and sale process,” and (d) lead to an increased risk that the entire reorganization could be jeopardized. Ditech further asserted that the consumer creditors were already adequately represented by the UCC, which owes a fiduciary duty to all general unsecured creditors. Alternatively, by limiting its scope and budget, Ditech argued that the Consumer Committee would only pursue “those legitimate goals for which the interests of the consumer creditors truly diverge…